One of the best commercial real estate investments today is the restaurant and hospitality industry. As people get busier and travel more, these sectors have boomed. Restaurants, especially, have benefited from the changes in the American lifestyle as families get busier and mothers grow less willing to invest daily work in making a family dinner - yet they still want their family to eat together and eat well.

Part of what makes restaurants such an attractive commercial real estate investment is the terms on which leases are often signed: long-term NNN, giving you a renter who is going to stay put and take care of most or all of his own maintenance and upkeep. In other words, you see a check every month, and that's it. Because of health department regulations, you won't even have to worry about property cleanliness.

The drawback, however, is that you need to do considerably more research up front before building that restaurant or hotel. Why? Because it's almost impossible to renovate and re-lease a business of this type at the original price; you almost always trade down. And worse, your renters are subject to a higher-than-usual fail rate for their businesses. Minimizing your commercial investment risks up front helps ensure your returns stay healthy later on.

Researching Your Potential Property

There are a number of things you need to know before deciding on a restaurant property as a commercial investment - most critically, what is its profit potential? Even if you're just leasing, the success of the restaurant determines whether your investment succeeds or fails. Aside from management and concept, the two things that will most determine success or failure are how many people are available to work in the restaurant and how many people are looking for places to eat out near the specific location of your property. As the hospitality industry is incredibly labor-intensive, that availability of workers will be the primary determinant of the business's success or failure.

Locations near transportation centers - airports, major interstate crossways, major train or bus hubs - are also ideal for hotels and motels. For this sort of commercial investment, you'll need to research relative room availability in the area. If a lot of rooms go unrented on average, your location is saturated, but if hotels tend to fill up, this area is likely to be ripe for a new hotel.

Find Your Lessor First

Once you've determined that your location and situation are conducive to a hospitality business, it's time to find a lessor. There are two reasons that your commercial investment should be dependent on filling your lease first: one, you won't waste time searching for a lessor who may or may not come, and two, you'll find it much easier to rent to a lessor who can do a build- or renovate-to-suit.

Once you've found your lessor, you need to put all that earlier gathered information to work. You must make sure your lessor has good funding, and adequate funding. Unlike other commercial real estate investments, getting involved in the hospitality industry makes it critical to have a good renter. A vacated building can lie fallow for months, even years, before a new renter comes along, and even then that new renter will need significant renovations and will be in a better bargaining position against you.


Restaurants are reputed to have a 90% fail rate. This is exaggerated; a little more than half fail within the first three years, and after that they tend to stay in business. This makes it especially important for you to check out the financing, the business plan, and the key employee track record of your potential renters. This may involve a good bit of taste testing, but we all must make sacrifices in the harsh world of commercial investment.

You're looking for a restaurant that projects at least a 20% ROI, preferably more. This is the minimum number that equity investors will accept when considering any kind of financing. Even if the business is being self-financed, your commercial investment is safer if others agree enough that the restaurant will succeed that they are willing to invest as well.

Minimizing Your Risk Exposure

After checking out the financials, you have a couple of other things to look at prior to making the commercial investment. First, does your renter have a restaurant track record, and what does it look like? If he ran a failed restaurant before, how can he guarantee that this one will not fail? Was there other excess baggage: lawsuits, creditors, tax problems, or health department violations? Have these been satisfactorily cleared, and have steps been taken to ensure that the same situation does not arise again?

With new restaurateurs, you need to look at a few other things: how can this manager ensure his business will be a success? Have they satisfactorily addressed legal, tax, and health department issues? If they're planning to be a franchisee (a common way for new restaurateurs to get into the business), is the franchise in good financial condition, or is it possible for them to fail in the future?

Addressing these key issues will protect your commercial investment by reducing that restaurant failure likelihood, and they put you one step closer to that nice hammock investment - allowing you to lounge around while your investment money works for you.


Where To Find Renters

The best news about using restaurants and hotels as a commercial investment: the market is wide open. Even in areas that seem to be saturated with restaurants, there's always room for a new and different one. All American chains are expanding fast, both in the U.S. and overseas, and this trend does not appear to be slowing. Private equity is being invested at a rapid rate in restaurants as well, which makes these investments very attractive.

The surprise here is that one of the best places to seek out new investments in American restaurants is from Asian and European restaurant groups. For a very long time, only a few restaurants in America were foreign-owned; today, that is rapidly changing. While the U.S. dollar is weak, American restaurants are even more attractive to foreign investors. American restaurant-goers are always looking for the new and unique, and they're willing to pay for it.